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Offer in Compromise vs. Installment Agreement

The two most popular IRS tax resolution options compared: settling your debt for less than you owe (OIC) versus paying the full amount over time (Installment Agreement). Learn which option fits your financial situation.

Quick Answer

The two answer different questions. An installment agreement pays the liability over time and, the IRS states, generally bars levy while a request is pending and while a plan runs. An Offer in Compromise asks the IRS to settle the liability for less, on grounds it publishes, and it decides on your full financial position. Neither this page nor any calculator can indicate which applies to you or what the outcome would be.

1

Offer in Compromise (OIC)

Advantages

  • The IRS states it may accept less than the full amount owed where that represents the most it can expect to collect within a reasonable period of time
  • Fresh start with reduced balance
  • Tax liens released after completion
  • Collection stopped while IRS reviews offer
  • Refunds applied to remaining tax years (not other debts)
  • Can include multiple tax years in one offer
  • Interest and penalties included in settlement
  • Clean slate after 5-year compliance period

Disadvantages

  • Strict eligibility requirements
  • The IRS rejects a substantial share of offers
  • Long processing time (7-12 months)
  • Complex application with extensive documentation
  • Must be current on all tax filings
  • An application fee and an initial payment apply unless the IRS low-income certification does. The IRS publishes the current amounts; this page does not restate them.
  • Must stay tax compliant for 5 years after acceptance
  • IRS keeps refunds during compliance period
  • Must make payments while offer is reviewed

Best For

What it asks the IRS to do: settle the liability for less than the full amount, on the grounds the IRS publishes. The IRS decides, on your full financial position.

Typical Cost

An application fee and an initial payment apply. The IRS states that under its low-income certification you send neither. Current amounts are on the IRS offer in compromise page.

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2

Installment Agreement

Advantages

  • The IRS publishes the conditions it applies
  • Quick approval (same-day for online streamlined)
  • Less documentation where the balance is at or below the IRS-published threshold
  • Stops wage garnishments and bank levies
  • Flexible payment options
  • Can be set up online
  • Lower professional fees if assistance needed
  • Keeps you in good standing with IRS
  • Can be modified if circumstances change

Disadvantages

  • Must pay the full amount owed eventually
  • Interest and penalties continue to accrue
  • Federal tax lien may still be filed
  • Monthly payments may strain budget
  • Default triggers collection activity
  • A setup fee applies, lowest when applying online with direct debit
  • Must stay current on future taxes
  • Long repayment period for large debts

Best For

What it asks the IRS to do: accept payment of the full liability over time under a written agreement.

Typical Cost

The IRS publishes setup fees that vary by plan type and application method, and are lower online. It waives the fee for low-income taxpayers paying by direct debit. Current amounts are on the IRS payment plans page.

The Verdict

The two answer different questions. An installment agreement pays the liability over time and, the IRS states, generally bars levy while a request is pending and while a plan runs. An Offer in Compromise asks the IRS to settle the liability for less, on grounds it publishes, and it decides on your full financial position. Neither this page nor any calculator can indicate which applies to you or what the outcome would be.

Frequently Asked Questions

Can I switch from an installment agreement to an OIC?
Yes, you can apply for an OIC even if you currently have an installment agreement. You would continue making installment payments while the OIC is being considered. If the OIC is accepted, the installment agreement ends and is replaced by the OIC terms.
What is Reasonable Collection Potential (RCP)?
RCP is the formula the IRS uses to determine the minimum OIC amount they will accept. It includes the equity in your assets plus your future income (monthly disposable income multiplied by a factor, typically 12 or 24 months depending on payment option). If your RCP equals or exceeds your tax debt, an OIC will likely be rejected.
What happens if my OIC is rejected?
You can appeal within 30 days. If ultimately rejected, you can still pursue other options like an installment agreement or Currently Not Collectible status. The time spent reviewing your OIC extended the collection statute, giving you more time to resolve the debt.
Can I negotiate my installment agreement payment amount?
Where the balance is at or below the IRS-published threshold for applying online, the plan is generally based on paying the balance within the term the IRS allows. The thresholds and terms are on the IRS payment plans page.

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Sources

Sourced to primary IRS materials and editorially reviewed. Not reviewed by a tax professional. Not tax advice. Report a correction.